Research shows that low-income countries pay sky-high interest rates on their foreign loans.
Analysis by the campaign group Debt Justice found that while interest rates have risen for rich and poor countries since the start of 2022, the rises have been particularly severe for some of the most vulnerable poor countries.
Debt relief will be high on the agenda at the World Bank’s annual meeting, which begins Oct. 10, Debt Judge said interest rates for low-income countries had risen an average of 5.7 percentage points, compared with a 2-point increase in the US
Many of the 27 countries that provided data faced much higher than average interest rates, led by war-ravaged Ukraine, which has seen the cost of its new loans rise from 10.2% to 46 since early 2022. %.
Ethiopia and Zambia have both seen a 25-point increase in the cost of their debt service as measured by the yield (or interest) on their foreign currency bonds. Interest rates for two-thirds of the countries surveyed are now above 10%, exacerbating debt problems and making it nearly impossible for them to borrow from private lenders, the campaign group said.
Heidi Chow, executive director of Debt Justice, said: “Many countries were already cutting critical spending to deal with the debt crisis before rising interest rates made an alarming situation worse.
“Countries like Pakistan are also facing colossal costs from the widespread devastation caused by the climate emergency. We urgently need mechanisms to quickly cancel debt for countries in need, especially high-interest loans from private lenders.”
Of the 27 lower-income governments with public information about their foreign currency bonds, Debt Justice found that nine had yields above 20%: El Salvador, Ethiopia, Ghana, Maldives, Pakistan, Sri Lanka, Tunisia, Ukraine and Zambia . Another 10 had yields between 10% and 20%: Angola, Cameroon, Egypt, Honduras, Kenya, Mongolia, Nigeria, Papua New Guinea, Rwanda and Tajikistan.
In addition to rising borrowing costs, the survey found that paying off debt was also made more expensive by a rising US dollar, which had appreciated by an average of 14% against the 27 low-income countries. Foreign debt is usually owed in foreign currency, especially the dollar.
World Bank president David Malpass said in a speech last week that debt relief would play a “key role” in easing the strain on poor countries’ budgets.
Malpass said the new financial crisis that followed Covid-19 is “affecting developing countries with eroded fiscal positions, including high debt and low fiscal revenues. Countries do not have enough budgetary buffers to support important growth and development spending.”